expand/collapse risk warning

Trading financial products on margin carries a high risk and is not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.

Trading financial products on margin carries a high degree of risk and is not suitable for all investors. Please ensure you fully understand the risks and take appropriate care to manage your risk.

Your capital is at risk.

Trading Terms

An analysis of fiscal policy: the role of government

fiscal policy image representation

What is fiscal policy?

Fiscal policy is a tool used by governments to stimulate or stabilise an economy during periods of financial uncertainty or economic fluctuations.

When markets are experiencing fluctuations that could threaten the stability of the economy, policymakers may adjust government spending and taxes to influence spending patterns.

However, effective implementation of fiscal policy requires careful consideration of various factors, including economic conditions, policy objectives, and public debt management.

Fiscal policy tools and measures

Fiscal policy is implemented by the government through the annual budget process. It involves measures such as changing tax rates, increasing or decreasing government spending and adjusting government transfer payments to individuals or households through social welfare programs.

Measures undertaken by the government can be categorised as either expansionary (also known as quantitative easing) or contractionary (quantitative tightening).

Fiscal policy tools and measures

Expansionary fiscal policy explained

Fiscal policy plays a crucial role in fostering long-term economic growth. By allocating resources effectively towards infrastructural development, research and development, education, and other key sectors of the economy, governments can lay the foundation for sustainable growth.

Additionally, tax incentives and subsidies can spur private investment, encourage entrepreneurship, and create employment opportunities. By adopting prudent fiscal policies that encourage private sector investment and innovation, countries can achieve higher productivity, increased competitiveness, and improved economic performance.

Expansionary fiscal policy explained

Contractionary fiscal policy explained

Conversely, during periods of overheating or inflationary pressures, contractionary fiscal policy, including decreased government spending and increased taxes, can help curb excessive spending, control inflation, and maintain price stability.

Contractionary fiscal policy explained

Fiscal Policy Objectives: Expansionary vs Contractionary

Expansionary Contractionary
Stimulate economic growth Control inflation
Increase employment Reduce excessive economic growth
Boost aggregate demand for goods and services Maintain exchange rate stability
Provide support during economic downturns Reinforce fiscal policy
Achieve macroeconomic stability Restore confidence and credibility

What's your Trading Style?

No matter the playing field, knowing your style is the first step to success.

Take the Quiz

Conclusion:

The implementation of fiscal policy can take various forms depending on the economic context and policy goals.

When policymakers actively adjust government spending and taxation in response to economic conditions, this is referred to as discretionary fiscal policy.

Alternatively, when progressive tax systems or social safety nets are used to provide stimulus or restraint during economic fluctuations, this is referred to as automatic fiscal stabilisers.

Ultimately, by employing prudent fiscal measures, governments can enhance macroeconomic stability, improve living standards, and create an environment conducive to inclusive and sustainable development.

Past performance does not guarantee or predict future performance. This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.

Thank you for considering Skilling!

You are about to visit: https://skilling.com/row/ which is operated by Skilling (Seychelles) Ltd, under the Financial Services Authority Seychelles License No: SD042. Before opening an account, please read the terms & conditions and contact our customer support for any questions.

Thank you for considering Skilling!

You are about to visit: https://skilling.com/row/ which is operated by Skilling (Seychelles) Ltd, under the Financial Services Authority Seychelles License No: SD042. Before opening an account, please read the terms & conditions and contact our customer support for any questions.

Continue